July 17, 2006	Monday	Jumadi-ul-Sani 20, 1427

THE federal government’s refusal to allow provinces to retire a part of their expensive cash development loans has hampered their ability to save money consumed by high interest payments.

At least three provinces including the NWFP are interested in reducing their burden of debt carrying mark up rate as high as 15 to 18 per cent and payable to the federal government.

NWFP’s ‘debt management strategy’ submitted to Islamabad some two years ago has not been approved. The Constitution also bars the provinces from availing loans directly from the open market.

“They [provinces] have the ways and means facility from the State Bank of Pakistan to meet their liquidity requirements in times of financial needs and they can also borrow funds for their respective food account – for procurement of wheat, etc,” says a finance manager of the NWFP government.

But other than that, the federating units do not enjoy the liberty to borrow funds directly on their own. The restriction is meant to prevent provinces from burgeoning their loan portfolio, added the official.

Though the provinces are barred to borrow funds directly from the market, they are also not allowed to reduce their expensive debts through fiscal management by utilizing ‘hidden cushion’ which, some of them have.

In the 2004-05 financial year, the NWFP had paid Rs2.1 billion to the federal government to prematurely retire CDLs involving 15 per cent and above mark up rate.

The provincial government had arranged the money by ‘borrowing’ it from its own ‘investment funds’ including pension fund and investments made by some of the provincial public sector semi- autonomous entities including Frontier Education Foundation, Forest Development Corporation, etc.

Though over one and a half year has passed since the provincial government deposited the money to the federal government’s account to get it adjusted against some of the expensive CDLs, the finance division Islamabad, has of late been showing reluctance to accept the amount.

Repeated requests from the provincial government, from time to time, also failed to get a positive response from the centre.

However, the provincial government, too, has not trying to get its money back in the hope of getting the same adjusted.

The federal government is opposed to the idea because premature retirement of CDLs by provinces has a negative impact the centre’s income on account of capital receipts.

Federal government, which had been extending CDLs to provinces up to 1997-98 to finance their Annual Development Programmes, raises billion of rupees capital receipts every year from mark up paid by the federating units against these loans.

According to the federal government’s budget documents, provinces pay between Rs25—30 billion every year on account of mark up / interest against CDLs.

The NWFP has to repay more than Rs22 billion CDL to the federal government and has set aside over Rs7 billion to clear part of the CDL during the 2006-07.

However, a major chunk of Rs5.5 billion, out of the total annual allocation, would be on account of debt servicing- mark up charged annually over and above the principal amount of CDLs.

The need to clear the expensive CDLs by obtaining loans with low mark up was felt, first, during the days of the last military-backed civil government in the province when the World Bank helped the NWFP prepare its medium- term provincial reforms programme seeking service delivery, fiscal management and economic development reforms.

Since then the province has been showing interest to gradually clear its entire CDL portfolio.

Following the foot prints of its predecessor, the clergy-led provincial government also kept pressing the federal government for allowing the province to clear the CDL and save the money going down the drain every year by servicing mark up.

The province saved about Rs2 billion after prematurely retiring Rs5.7 billion against the expensive CDLs in 2002-03 and Rs1.9 billion in the 2003-04. The federal government had to accept the pre-payment of Rs7.6 billion after the province paid the same in line with a structural adjustment credit agreement with the World Bank – which was facilitated by the centre.

The saving resulted in creating much wanted fiscal space for the resource constrained provincial government. It enabled the province to meet its escalating establishment cost, which experienced steep rise during the past four years because of the federal government’s unilateral decision of increasing public sector employees’ salary – four times during the last six years.

Recently, according to official circles, federal authorities have consented to adjust only those amounts that would come from structural adjustment credit to provinces.

“In a recently held meeting at Islamabad, federal government agreed that funds provided by provinces in line with their structural adjustment credit with the World Bank would be adjusted against expensive loans,” said a high ranking official.

In this respect, the centre, according to sources, had agreed to clear CDLs pertaining to the period from early 1980s to 1989.

Though the move is welcome for the provincial governments, the centre’s refusal to allow provinces to clear their expensive CDLs by funds other than those coming from the World Bank would deprive them from undertaking innovative measures to reduce their liabilities.

The provincial government saved about Rs8 billion during the last four years due to premature retirement of expensive CDLs. Whereas, actual benefit would be much more than that in view of the original re-payment schedule of the loans cleared.

Official and experts are of the view that the federal government should encourage federating units to off load their expensive CDLs and divert the saving so recorded, to social and economic wellbeing of the people.

“Why should government disallow if any one of the provinces wants to prepay their costly loans before the scheduled time,” said a finance manager, adding that “the decision should be left to the provinces.”

The restriction imposed by the federal government has not only deprived provinces from pursuing prudent fiscal policies, it has also undermined the financial autonomy guaranteed by the Constitution.